GST: Reverse Charge Mechanism (RCM) With Example

| 2 years ago

Reverse charge under GST

What is Reverse Charge Mechanism(RCM)?

 Under Reverse Charge mechanism, recipient of a supply is liable to pay the tax directly to the govt.

Here, an organized business (registered) takes over the burden of tax compliance for an unorganized business (unregistered).

Scenarios where GST’s reverse charge applies:

  1. Receipt of Specified goods and Services [u/s 9(3) of CGST]
  2. Where goods or service is supplied by an unregistered person to a registered person[u/s 9(4) of CGST and 5(4) of IGST]
  3. Supply of services through an E-Commerce operator [u/s 9(5)]

Let’s read it one by one 🙂

 

2. RCM, where goods or service Supplied by an Unregistered Person to a Registered person

 

A. Under section 9(4) of CGST Act, 2017 

 In order to increase the tax base, Govt. is trying to merge those unorganized sectors into an organized sector.

As per section 9(4) of CGST Act, 2017 every registered person is liable to pay GST (CGST+SGST)  on every inward supply (purchase) from an unregistered person.  In addition to this, he is also liable to issue tax invoice and Payment vouchers on every inward supply from such unregistered person.

This will discourage a registered person from procuring supplies from an unregistered person. In order to stay in the business, unregistered persons will be compelled to get GST registration.

Example: Mr.Ram (registered) purchase goods from 3 unregistered persons valuing Rs.1500, Rs.2000, Rs.1000 in a day. Here Mr.Ram will not be liable to pay tax under RCM because the total purchase (1500+2000+1000) in a day does not exceed Rs.5000.

 

😮 Latest update: Applicability of RCM u/s 9(4) has been deffered till 30th Sept, 2019. [Notification]

 

B. Under section 5(4) of IGST Act, 2017

Supplier- Un-registered person

Recipient- Registered person

Supply- Inter-state supply of goods or services or both

IGST payable by- Registered recipient under RCM

An inter-state supplier of goods is compulsorily required to get GST registration. Therefore RCM provision for the interstate supply of goods is not possible.

However, an inter-state supplier of services is not compulsorily required to get GST registration. Therefore RCM provision for the interstate supply of service is possible.

RCM u/s 5(4) of IGST Act, 2017 has been suspended till 30th Sept, 2019. [Notification]

 

2. RCM, Where a person receives supplies of Specified Goods or Services [u/s 9(3) of CGST Act]

List of Goods  under Reverse Charge:

Sl no Description of
supply of Goods (RCM)
Supplier of Goods Recipient of supply
1 Cashew nuts, not
shelled or peeled
Agriculturist Any registered person
2 Bidi wrapper
leaves (tendu)
Agriculturist Any registered person
3 Tobacco leaves Agriculturist Any registered person
4 Silk yarn Any person who
manufactures silk yarn from raw silk or silk worm cocoons
for supply of silk yarn
Any registered person
4A Raw cotton Agriculturist Any registered person
5 Supply of lottery State Government,
Union Territory or
any local authority
Lottery distributor or selling
agent
6 Used vehicles, seized and confiscated goods,
old and used goods, waste and scrap
Central Government,
State Government,
Union territory or
a local authority
Any registered person
7 Priority Sector Lending
Certificate  (PSLC)
[Tradable certificate issued by RBI to the financier’s of priority sector like a loan to farmers]
Any Registered Person Any Registered Person


List of services
 under Reverse Charge:

Sl no Type of Service Supplier of Service Recipient of Service located in Taxable Territory (liable to pay GST)
1 GTA service for goods by Road Goods Transport Agency (GTA)  who has not paid central tax at the rate of 6% Following persons, if they pay or is liable to pay freight:
1. Factory [as per Factories Act]
2. Society [as per the Societies Registration Act or under any other law for the time being in force]
3. Co-operative society
4. Any person registered under GST
5. Body corporate (Companies)
6. Partnership firm & AOP
7. Casual taxable person located in the taxable territory.
2 Legal services Individual advocate including a senior advocate and Firm of advocates Any business entity
3 Any Service An arbitral tribunal Any business entity
4 Sponsorship Service Any Person Any body corporate or partnership Firm
5 Any service other than:
1. Renting of immovable property
2. India Post’s Service by way of speed post, parcel post, life insurance, and agency services
3. services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an Airport
4. Transport of Goods or passengers.
By
Central Government, State Government, Union territory or Local Authority
To
Any business entity
5A Renting of Immovable Property by Central Government,
State Government,
Union territory or
local authority
To
a person registered
under the GST Act
6 Any Service by Director A director
of a
company
or a body
corporate
To
The company or a body corporate
7 Any Service by Insurance Agent An insurance agent Any person carrying on insurance business
8 Any Service by Recovery Agent A recovery agent  A banking company or a financial institution or a non-banking financial company
9 Service of an Author, Music Composer, Photographer, Artist or the Like Author or music
composer, photographer, artist, or the like
Publisher, music company, producer or the like
10 Any Service By
the members
of Overseeing Committee
To
Reserve Bank of India (RBI)
11 Service provided by Individual Direct Selling Agents (DSA) By
Individual Direct Selling Agent (DSA)
To
A banking company or a
non-banking financial
company
12
[IGST]
Any Service By
Person located in a
non-taxable territory
To
A person located in the taxable territory
Except: Online recipient who are non taxable
13
[IGST]
Service of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India. By
A person located in Non-taxable territory
To
An Importer


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“Under Reverse Charge Mechanism, the Recipient (buyer) will be liable to comply all the provision of GST”.

GST Registration by Supplier of RCM Supplies

A supplier whose aggregate turnover exceeds 20 lakh in a financial year(Rs.10 lakh for North East states) should take registration within 30 days from the date on which he becomes liable to for registration.

Aggregate turnover includes outward RCM supplies.

However, exemption from registration has been provided to suppliers who are making only those supplies on which recipient is liable to discharge GST under RCM.

 

Input Tax Credit (ITC) of Tax paid under RCM

Tax paid under Reverse Charge Mechanism is eligible for input tax credit (ITC). However, these taxes should be paid first before claiming input tax credit.

Further, there are many cases under which a recipient is not eligible to get ITC of tax paid under RCM basis. Example:composite dealer is also not eligible for ITC whether it be on reverse charge basis or forward charge basis.

 

Invoice (not tax invoice) and Payment voucher under RCM

Every person who is liable to pay tax under the reverse charge shall issue invoice while purchasing and the invoice should also indicate that the tax is payable on reverse charge basis.

Recipient of supply should also issue payment voucher while making payment to the suppliers. Read more about invoicing –HERE.

 

Time of Supply under RCM where goods are involved

While calculating tax liability under GST, apart from other things, “place of supply” and “time of supply” is very important. There is no separate provision of “place of supply” for reverse charge transactions. However, “time of supply” for reverse charge transaction is prescribed separately.

Time of Supply shall be earlier of the following dates:

  1. Date of receipt of goods
  2. Payment date(earlier of the date of payment entry in the recipient’s book or date of debit in bank a/c)
  3. 30 days from the issue of invoice or any other documents

If it is not possible to determine the time of supply under (1), (2) or (3), the time of supply shall be the date of entry in the books of account of the recipient.

Example:

  1. Date of receipt of goods: 26th November
  2. Payment Entry in the recipient’s book: 5th December (Consider this as payment date)
  3. Date of debit in Recipient bank a/c: 7th December
  4. Date of issue of the invoice by the supplier: 20th November

Determine the time of supply under RCM.

Solution: In the above case, the time of supply would be 26th November. However, in case (1), (3), and (4) are not available, the date of entry in the books (journal entry or payment entry) i.e 5th December would be considered.

Recommended to Read: Accounting Entries For Reverse Charge Mechanism (RCM)

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Time of Supply under RCM where services are involved

Time of Supply shall be earlier of the following dates:

  1. Payment date (earlier of the date of entry in the recipient’s book or date of debit in bank a/c)
  2. 60 days from the issue of invoice or any other documents

If it is not possible to determine the time of supply under (1) or (2), the time of supply shall be the date of entry in the books of account of the recipient.

In case of supply of service by associated enterprises: (For example a Foreign branch of TCS), where the supplier of service is located outside India, the time of supply shall be:

  1. The date of entry in the books of account of the recipient of supply(Indian Company i.e TCS) or
  2. the date of payment,

-whichever is earlier.

wait – there ’s one more !!

e commerce

 

 3. RCM, Where services are provided through an E-commerce platform [u/s 9(5)]

If any prescribed intra-state service is provided through an E-commerce than such platform shall be liable to pay GST (CGST+SGST) in respect of such supplies.

Following prescribed services are covered under section 9(5) of CGST Act, 2017-

  1. services by way of transportation of passengers by a radio-taxi, motorcab, maxicab and motor cycle. Example- OLA, UBER
  2. Accommodation service in hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes through an E-commerce like oyorooms.

Exception:  Where the turnover of service provider exceeds Rs.20 lakh (10 lakh for special category states) then such person needs to take registration and charge GST.

Example 1: A person provides homestay through oyorooms (E-commerce) and his turnover is Rs.8 lakh only. In this case, oyorooms shall be liable to pay GST under section 9(5) of CGST.

Example 2: Mr.Raghu provides homestay through Airbnb (E-commerce) and his turnover is Rs.23 lakh only. In this case, Mr.Raghu shall be liable to get GST registration and pay GST.

 

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